Financial Risk Management

Using Petroleum Stock Derivatives for Hedging Oil Price Volatility Risk: A Study of Iranian Firms

Article Details

Pub. Date	: Sep, 2021
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM40921
Author Name	:Zahra Ghadiri, Bharath V and G Kotreshwar
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 12

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Abstract

Oil price volatility is one of the major sources of risk impacting Iranian oil revenues. Stabilization of the oil revenues through hedging is necessary for sustaining a stable economy. Petroleum stock derivatives are of interest for hedging oil price volatility. The hedging instruments studied in the present paper are derivative contracts of New York Mercantile Exchange (NYMEX) oil stocks. Employing econometric methods, the paper evaluates risk hedging strategies to attain the optimum position efficiency. The results indicate that applying derivative contracts would lead to substantial reduction in the level of oil revenue risks.

Introduction

Revenues obtained from crude oil exports have a considerable impact on Iran's economy, as more than 80% of the export income (OPEC, 2014) and 40% of the government revenue depend on oil earnings. Stabilizing oil revenues through hedging is necessary for achieving a stable economy. However, market risk is a common feature of crude oil markets. Many suppliers and consumers have been seeking a solution for reducing the market risk.

Petroleum stock derivatives are being used by oil refineries for hedging oil price risk. Markets for these derivatives have witnessed robust growth in their volumes in the recent past. This study has been undertaken to examine the effectiveness of oil derivatives for hedging oil price risk on the basis of evaluation of different hedging strategies to determine optimal hedging ratio.